The Resolution of International Construction Disputes1

Robert Fenwick Elliott

What is the Relevance of the International Experience?

My experience is of the resolution of construction2 and other commercial disputes, often large or very large, in the UK and also more or less every continent (except Antarctica). Why would it have any relevance to practitioners in South Australia?
There are two answers. The first is logical but aspirational; South Australia is a place which could serve as an excellent base for international dispute resolution. Lawyers here understand a mainstream common law system, and speak English as a first language, which is a big advantage over continental Europe. There is a pool of well qualified local lawyers who charge, by London standards, modest rates. It is a safe, very civilised place to visit with good food and wine, which is a more important factor than you might think in the minds of project managers in the Sudan or legal departments in an American suburb. Certainly, it is a way away from many other places, but it is no further from the Far East than London (where much of the business is now done), and the wide use of broadband and the cheaper cost of air travel mean that the world has shrunk a great deal. More importantly, the legal world here has a reputation of being corruption free, and local judges and lawyers are unlikely to have a financial stake in either party’s success. A number of lawyers in London practice around the world; why not here too?
Maybe that is an outside bet, but here is a racing certainty: the changing nature of large project dispute resolution at the sharp end is spreading around the world fairly fast, and is bound to catch up here in the short to medium term. Adjudication has already reached New South Wales and Victoria. ADR has, in most commercial centres around the world, moved on from a warm-fuzzy mish-mash into a highly developed (and rather aggressive) system of fast-track commercial pressure. The techniques needed for these systems are markedly different from those that work in litigation or traditional arbitration, and old-style play simply loses, time and again, in the new games. Further, contractors and employers who have seen the new international regime are likely to be less tolerant of the old inefficiencies, and are tending more now to demand advice about how to resolve their disputes more quickly and cheaply3.
The remarks that follow are based largely but not exclusively on construction project disputes, but the principles apply to all heavyweight commercial disputes.

The Arsenal

The range of methods for resolving international construction disputes is now large. In particular4:

Negotiation

Most disputes at all levels are settled by the parties themselves before their lawyers lock horns; international disputes are no exception. But there are some differences which tend to manifest themselves:

International projects often involve consortia, and hence more decision making by consensus or even committee. Many projects are funded by the World Bank, or some other governmental or quasi-governmental agency. Legal opinions are thus often more influential that might otherwise be the case, especially if there is 3rd party funding. They are sometimes shared; expect some fairly ruthless legal fire.

The new system for litigation in England involves the Construction and Engineering Pre-Action Protocol, which all litigants are required to follow before commencing proceedings5. The protocol calls for a pre-action meeting at which, inter alia, the parties’ lawyers are typically required to canvas the merits of the available dispute resolution systems, including their likely cost. This process tends to urge the parties into agreeing either a more efficient dispute process, or even an overall settlement based on an exchange of their lawyers’ assertions as to the strength of their cases that are typically reasonably plausible, even if not entirely frank. The protocol is not binding on arbitrations or other international processes, but it influences the climate.

ADR

There are at least two main strains of ADR6:

Facilitative. This is the better known flavour in domestic disputes. The neutral is trained never to express any opinion about the merits; the parties are supposed to reality-check themselves into a state of willingness to put their pasts behind them. This is the mainstream UK approach: ADR with a feminine side.

Evaluative. The harder-nosed American approach. The neutral listens to each party, and in caucus session7 will not be shy of telling one or both parties if he thinks they have unrealistically high expectations of the likely result of litigation or arbitration.

The international tendency is to go for the evaluative end of this spectrum. There is less emphasis on mediation; more on evaluative systems of conciliation, mini-trial or hybrid processes8. Hybrid processes are particularly effective, combining the highly-guillotined legal presentation elements of mini-trial in the American mould with the caucus system from mediation.

When government agencies are involved, mediations tend to be harder to arrange, but more influential when they happen. Written recommendation is often very effective.

These are still important, especially in civil engineering projects where traditional consulting civil engineers are appointed.
Sometimes, one still sees the ICE procedure of an Engineer’s decision, whereby the certifier (or his boss) can change his mind. Legal submissions sometimes work, but not often.

Disputes Review Boards

This is the standard American model9 in large projects; features include:

All three members of the DRB are neutral and paid equally by both parties.

The DRB is organized when work begins, before there are any disputes, and keeps abreast of job developments by means of relevant documentation and regular site visits.

Either party can refer a dispute to the DRB.

An informal but comprehensive hearing is convened promptly.

The written recommendations of the DRB are not binding on either party but are admissible as evidence, to the extent permitted by law, in case of later arbitration or litigation.

Whilst not binding, DRB processes are typically 99% determinative.

Adjudication

This is the UK model in all construction contracts; it reflects part of a trend towards multi-tiered dispute resolution systems, and has established itself as the central intermediate system. It has been spreading to other jurisdictions10.
The decision – on any dispute - is made within 28 days (or so). In theory, the process can be inquisitorial. There is usually an informal hearing, but only informal evidence and no discovery/disclosure of documents. The loser has to write a cheque, but either side can start again in litigation or arbitration; less than 1% do.
Note that the skills of trial lawyers such as barristers are often not well matched to adjudication or ADR; the most effective style is more like live documentary, using sound bites and 2 or 3 examples to make points, rather than grinding cross-examination.
Adjudication is sometimes11 used in international projects, and is particularly usefully used as a trigger for the call of demand bonds.

Expert Determination

A close cousin of adjudication, seen most often in energy contracts or bonding arrangements. In common law, the expert’s decision is binding without review if the expert has answered the right question.

International Arbitration

In international civil engineering contracts, arbitration is often provided for before the International Chamber of Commerce (ICC), because that is what FIDIC says. Typically,

The conciliation stage is often by-passed

Usually three arbitrators. Impartiality of the flankers is not assured; the Umpire/Chairman/3rd Arbitrator is usually impartial.

Request for Arbitration: the first round of pleading. Beware omissions!

Discovery/disclosure can be ordered, but do not expect uniform standards.

ICC fees are not insignificant12; they are payable up front. NB Defendants often do not pay their share: Claimants then have to pay all, but can ask for separate advances for claim and counterclaim.

6 months for Award – a rule much honoured in its breach.

The role of the Court13 is not that a court at all, but a supervisory body. Get to know the assigned counsel in Paris.

Note that the seat of the arbitration may not be the governing law. And the parties may agree to proceedings taking place somewhere other than the seat14.

Depending on local law, the right to interest can be either substantive (eg French law) or procedural (eg English law); there may be a black hole15. Sharia forbids interest, but even under Islamic law cases it is usually awarded by way of financing charges or other synonym.
Jurisdictional challenges are very common in large project disputes, going to the scope of the arbitration clause and/or the identity of the parties.
Traditionally, the most expensive form of dispute resolution yet invented except all-out military conflict.
There are some trends which have been emerging in international arbitrations:

There is some move towards more emphasis on written submissions at the expense of the common law oral tradition. These submissions often combine legal submission, a laying out of the evidence relied on, and sheer rhetoric.

Mix and match; eg the use of tribunal appointed experts to assess delay claims, but with legal issues reserved by the tribunal to itself. In practice, it is very rare for the tribunal to do other than accept the findings of its appointed experts wholesale, and the work of the experts is like an expert determination within the main arbitration16.

Enforcement is usually via the New York Convention17; beware exceptions like Libya.

Bonding/Asset freezing

Demand bonds are often used as levers. A golden rule for all international construction contracts is: never advise until you know the bonding position. Many international contracts are bonded by means of demand bonds18, and few countries will prevent wrongful call by injunction19 even though there has been widespread international abuse of them. Increasing, and wisely, contractors providing bonds now often insist20 that the bond may be called only on production to the paying bank of an expert determination or adjudicator’s decision that the call is justified.
The place for call of a bond is often not the seat of the arbitration; there is often a need for local law advice.
Note that some countries, eg Holland, are fairly generous with pre-action freezing orders.

The Law

In construction disputes, as in other walks of life, people tend to do what they know best how to do. Arbitrators from the common law stable tend to apply a commonwealth law, taking in cases in particular from UK, Australia, Singapore and Hong Kong; many other jurisdictions have precious little to say about construction law issues. Submissions will often endeavour to lard a few local cases into the wider tapestry, even if such cases add little by way of legal illumination.
Note the importance of quantum meruit claims, which are often used to fill gaps even where there is a contract21

Corruption

Corruption is endemic in large projects involving international players. It is rarely proved, but note particular sensitivity for citizens of the USA, where bribing anywhere in the world is a crime. Bribery of arbitrators in corrupt climates is unusual in three-man ICC tribunals, because it will be taken for granted that the party-appointed arbitrators will be in the pockets of their appointers, and the chairman is almost always straight.
Robert Fenwick Elliott22

fenwickelliott@bigbutton.com.au

1 Much of the content of this paper was delivered in Melbourne to the AIB Summit in October 2003.

2 The term “construction” here traditionally covers both building and civil engineering, but there has been something of a shift in recent years. It used to be the case that the largest projects around were essentially civil engineering – dams, railways, bridges and so forth. But now, most of the largest projects in the world are in the energy sector, typically producing, transporting or processing hydrocarbons either on-shore or off-shore. Even the making of an FPSO (where an oil rig is built onto the deck of a tanker ship) is now typically treated, not a sub-set of shipbuilding, but as a construction project.

3 By way of example, a survey of traditional litigation costs in London in the mid-1990’s showed that aggregate cost of construction litigation usually exceeded the sum recovered. Traditional arbitration was no better. Now, only a small fraction of disputes go through these processes: the vast majority are run through adjudication or ADR at about 10% of those costs. Surveys repeated show that clients who have been through these new intermediate processes are often most unwilling to go back to the old systems. In a domestic arena, they may have no choice, but internationally they can opt for the newer systems.

4 The following table is adapted from that at Fenwick Elliott Building Contract Disputes: Practice and Precedents (Sweet & Maxwell) Chapter 2

6 In this paper, the expression ADR is used in the conventional sense to describe processes that are entirely non-binding in the legal sense. The expression “intermediate” is used to describe adjudication, expert determination of bond calls or interim payment certification, or other processes which proscribe what is to be paid by way of cash flow, but not the eventual rights of the parties.

Between the two extremes, there are many shades of grey.

7 I.e. confidential session with just one party.

8 For a description of these processes, see BCD Chapter 3. Very briefly:

Mediation is typically a one-day process, where most of the work is done in caucus;

Conciliation is like mediation, but with the neutral making a recommendation if necessary;

Mini-trial might be 1, 2 or 3 days, each party’s lawyers making a short presentation to a panel of 3, being the neutral and a senior executive for each party who was not involved in the project. The panel listens to the presentations, and then makes a non-binding recommendation for the terms of settlement;

Hybrid processes are a meld of mediation and mini-trial.

Note that med-arb, where the neutral turns into an arbitrator is the mediation fails, is rarely if ever used in international disputes, no doubt because of the jurisdictional difficulties that would arise on enforcement.

9 There is a good website of the DRB Foundation at www.drb.org.

10 See, in New South Wales, the Building and Construction Industry Security of Payment Act 1999;

in Victoria, the Building and Construction Industry Security of Payment Act 2002; in New Zealand, the Construction Contracts Act 2002. For a general review of the international spread of adjudication, see www.tonybingham.co.uk/column/2003/20030704.htm. Even where adjudication is not established in the local legislation, its influence is being felt; for example South Africa’s Construction Industry Development Board advises that, “Adjudication has become the preferred international procedure for dispute resolution” (www.cidb.org.za/initiatives/cd/codeconduct/Preamble.htm).

11 And, it seems, increasingly.

12 On a sliding scale: up to 20% of the sum in dispute for small cases (less than $US 50,000) falling to less than 1% over $US 100 million. But much of the scale fee may be returned when a case settles.

13 Based in Paris, but many of its staff are American.

14 Eg in “City of London” clauses; cases are just as often heard in Westminster. Paris cases are often heard in London.

15 Eg where the contract is subject to English law, with ICC arbitration in Paris.

16 The word “expert” is used to describe both an expert witness appointed by a party to give evidence, and a neutral person who makes an expert determination. In this less common situation, the expert falls more into the latter category, albeit that in this case his report is theoretically evidence given to the tribunal.

20 Notwithstanding that the form of the bond is usually prescribed in the tender documents.

21 Pavey v Mathews (1987) 162 CLR 221, (1987) 61 A.L.J.R. 151 is often referred to internationally. It is important, because it disturbs the old shibboleth that quantum meruit cannot be used to provide a cause of action for payment for work done pursuant to contract. Thus where a contract provides something along the lines of, “No claims will be entertained for tiddly-push”, it is arguable that the contractor can be paid for tiddly-push by way of quantum meruit, or in Islamic jurisdictions, by way of Sharia equivalent. Typically, such claims are met by a jurisdictional challenges, the defendant arguing that the arbitrator’s jurisdiction is limited to contractual claims.

22 AIAMA, Solicitor of the Supreme Court of Judicature of England and Wales, Consultant to and founder of Fenwick Elliott LLP, Solicitors, London (www.fenwickelliott.co.uk), Vice-President and former Chairman of the Technology and Construction Solicitors Association, accredited as a mediator by the Centre for Dispute Resolution and the Institute of Mediators and Arbitrators of Australia, and as an adjudicator by TeCSA, the Chartered Institute of Building and the Construction Industry Council, Founding Chairman of the International Construction Law Alliance, former editor of Construction Industry Law Letter, author of Building Contract Litigation (Longman) and Building Contract Disputes: Practice and Precedents (Sweet & Maxwell).